9/12/2017 5:42:00 PM CEST Add a Comment
The states of the patterns
The price patterns, since they are identified by ATmatix, until reaching the target price (or maybe not) in a certain period of time, may be in a few
states (or statuses). All of them are described below.
NEW/ UNCONFIRMEDWhen ATmatix detects a new pattern, it finds all the local peaks and valleys within the pattern. On the chart, they are marked as green or red arcs. Additionaly, for some types of patterns, those points in charts are connected with a blue dotted line, as it is easier to observe some price movement schemes.
Every pattern has its starting point (the first, the earliest local peak or valley, which could be identified) and the end-point (the last peak or valley). The end-point is also a date of pattern detection, presented in the pattern list view.
At the time of the detection, two levels of breakout are determined (trendlines limiting the pattern from the top and bottom):
- Downward breakout level (red line)
- Upward breakout level (green line)
For some linear patterns, where breakout levels are inclined at an angle (triangles, wedges, channels, etc.), some fragments may be marked with solid lines, as it is easier to observe the shape of a pattern; other fragments may be marked with dotted lines.
A solid line is used within a pattern area (between the starting point and the ending point) and the dotted line is just an extension of that line outside the pattern.
It is intresting to notice that for some linear patterns, the breakout lines, inclined at an angle, get closer to each other and converge at some point.
It happens, for instance, in case of triangles or pennants. Then, the intersection point becomes the last moment, where the breakout is possible.
More on breakouts can be found below.
Certain values characteristic of the pattern are calculated immediately after its detection. Those are:
- The width of the pattern (the number of sessions, or candlesticks in chart, between the starting point and an end-point),
- The height of the pattern (the percentage difference between the highest and the lowest price value within the pattern),
- The potential of the pattern (expected percentage price change to the hypothetical target, assuming there were an upward breakout on the day of its detection). After the actual breakout, the potential is calculated again. More information below.
- Volume trend – the approximation of the turnover volume value from the starting point of the pattern to its endpoint, determined by the linear regression method. The slope of this approximated line may be falling or rising.
- Breakout statistics – based on the pattern type and the historical data. Please, note that these statistics may not add up to 100%.
The statistics are calculated in this way:
- In case of an upward breakout, the occurrence is counted as the upward breakout (nevermind throwbacks)
- In case of a downward breakout, the occurrence is counted as the downward breakout (nevermind pullbacks)
- In case of the upward breakout and then throwback, not reaching the target price, and then downward breakout (or the other way round), the statitistics take into account the move that was stronger after one of the breakouts
- No breakout at all – often it happens with triangles, whose area is bounded by two approaching lines. Also the time span ATmatix waits for a breakout, is limited.
|New, emerging double bottom pattern - example
What time does ATmatix wait for a breakout?
I have already mentioned the triangles or pennants – if the breakout (upward or downward) doesn’t occur within the pattern, then the breakout will not be detected by ATmatix (and will be counted as no breakout, which is why the upward/downward breakout statistics not always add up to 100%). Obviously, the price may choose a particular direction after some time, but it couldn’t be confirmed with a breakout within the pattern area.
It is slightly different for the patterns for which the breakout levels are constant values (for instance double bottom) or lines not expected to cross in the future (i.e. channels, broadening patterns).
Then the breakout time limit since the detection date is: the width of the pattern (number of sessions), but not less than 60 sessions.
For example, for double bottoms 30 sessions wide, we wait 60 sessions for the breakout, and for a double bottom 80 sessions wide, we wait 80 sessions.
NEAR BREAKOUTIf the price approaches an upward breakout level from the bottom, or approaches a downward breakout level from the top, but not pierces it, then ATmatix marks it as “ near breakout” ( upward or downward). Those occurrences are detected with some tolerance. For the constant (horizontal) levels the tolerance is 2.5% for stocks and 1% for indices/futures.
Some additional conditions apply:
- For “near upward breakout” – there has to be no decline on that day – the price hasn’t changed or has risen, reaching almost the upward breakout level with the tolerance as mentioned above,
- For “near downward breakout” – there has to be no rise on that day – the price hasn’t changed or has declined, closing to the downward breakout level with the tolerance as mentioned above.
It is essential to notice that if the price will make the breakout with one-day strong movement, then the “near breakout” event may not be detected at all.
That can be also signalled a few times, when the close price of a stock approaches the near breakout area several times during the following sessions.
Those occurrences are marked in the charts with yellow arrows, next to which a close price and an event date are given.
|The pattern is close to the upward breakout - example|
BREAKOUTSA breakout happens when the price pierces upper or lower level of the breakout (goes through the trendlines limiting the pattern) on a given day.
The pierce of the constant breakout level is detected in case when the close price exceedes the level even by a penny. In case of linear breakout levels (leaning at some angle) the breakouts are detected with some tolerance.
It happens because the detection of trendlines itself works with a certain tolerance (the lines may not lay perfectly on the three selected points in the chart and the line may in general be based on different point combinations – give a technical analyst a task to draw the trendline and you’ll know what I mean).
For this reason, piercing the trendline by even the smallest margin, could result in a false breakout – this is why we have set up some tolerance. Additionaly it’s good to observe the turnover volume on the day of the breakout.
Currently, the tolerance is 0.55% for stocks and 0.32% for indices/ futures. The values were empirically selected as a compromise between large number of possibly false positive signals and their validity.
Usually the price volatility for indices/futures are rather smaller than for stocks, which is why we have decided to divide the list of instruments into two groups, and for each of them some parameters of the pattern scanner are different (the statistics are alsbo calculated separately for stocks and indices/futures).
Other values caltulated after the breakout are:
- Breakout price – the level, for which the breakout occurred. Price targets are calculated in relation to this level (with a rare exceptions, such as flags and pennants)
- Potential – the value is updated according to the direction and price of the breakout. It comes right from the target price computed with a measure rule for a given pattern type (explained below). The values less than zero mean that a certain decline is expected
- Turnover volume on the day of the breakout – this is a relative value, comparing the turnover volume with the average volume from 30 pre-breakout sessions. It is a percentage, where value below 0 shows that the volume was smaller than the average, and the value above 0 means the volume was greater than the average.
In case of pattern types commonly regarded as “continuation” patterns, it is hard to speak in terms of pattern confirmation or invalidation, so the breakout direction usually (but not always) means the direction of the preceding price trend is sustained.
|The upward breakout - example|
The most important data – target prices – are calculated after the breakout. They are presented with the statistical efficiency rates of such breakouts, based on the historical data. Please remember that any historical data does not guarantee you will get the same outcome in the future, but they are a good (and the only reasonable and available) reference when estimating risk of success or failure.
Usually, the target price (we can treat it also as a take profit level after an upward breakout or the purchase opportunity after the downward breakout move is completed) is measured by adding the absolute value of the height of the pattern to the breakout price – there are some exceptions to that rule, but I will dwell on it some other time.
These are the theoretical breakout levels and the description of their measure rules may be found in many books and across the Internet. I emphasize that such theoretical levels are not always specified. The specialized literature often says nothing about calculating targets after the downward breakout for bottom patterns or the upward breakout for top patterns.
The unique feature of ATmatix is calculating one more target level, based only on the historical data of the patterns. Those statistics allow us to compute, first of all, the effectiveness of the theoretical measure rules (the percentage of reaching the targets in the past), and secondly, they allow us to set the target level with a certain value of probability (based on the historical data).
Because it is a highly complex matter, and probably the most important for the application, I will describe it in detail in some other posts.
For now, to sum it up – ATmatix sets the target range of two values (from – to):
- Theoretical level (and presents the effectiveness of reaching it in the past) – it is not always possible to calculate it – i.e. it is missing in case of the downward breakout form the bottom pattern – as I’ve mentioned it above,
- The statistical level (reached with certain probability, based on historical data) – this level is always calculated. The exception is when we don’t have the statistics for a certain type of pattern or our data sample is too small.
ATmatix also displays the expected percentage price changes related to the breakout price (this is the potential of the price change). Let’s remember that these are the values calculated with the assumption of the perfect trade and there is no guarantee of achieving such results. We often fail to buy the stock exactly at the breakout price and sell them right at the target price, and the profit will be reduced by the transactional costs.
Nevertheless, we know what to expect and whether the transaction made on the basis of one, certain pattern, will be more or less profitable, more or less risky than for some other pattern – thanks to the calculated target levels and statistics gathered by ATmatix.
One more thing – there may be some situations in which the breakout goes one direction, the price doesn’t meet the target price, then there is a throwback (or pullback) and the price breaks out in the opposite direction.
Then we can say the pattern is busted. ATmatix detects only two breakout occurrences in different directions - after the breakout, there may be a reversed one. In such case, the target levels are adjusted accordingly.
In case of the third change of the breakout direction (the third breakout directed opposite to the second breakout and in the same direction as the first one), such situation is not being detected. Those cases (multiple pattern busts) are rather rare, but of course still possible.
Those breakout events are labeled with green or red arrows in the charts, depending on the breakout’s direction. Next to the arrow, you can see the closing price and the breakout date (month and day).
MEETING THE TARGET PRICEWhen the asset price after the breakout reaches at least the predicted target range, the pattern is completed. Certain conditions have to be met:
- After the upward breakout, the high price on a certain day has to reach the value greater than or equal to the lower level of the target range
- After the downward breakout, the low price on a given day has to reach the value lower than or equal to the upper level of the target range
The time limit for meeting the price target, since the day of the pattern detection is currently set to 90 sessions, regardless of the width of the pattern.
In the charts, those occurrences of pattern completion are labeled with blue arrows. Next to the arrow, there is the low or high price on the event day (depending on the direction of the breakout).
|The stock price reaches its target after the breakout - example|
COMMENTSIrrespective of reaching the target price in a certain time limit or not doing so, ATmatix tracks each pattern for some period yet.
So, after some time since the pattern completion or since ATmatix has stopped tracking the pattern, its data is deleted, but it is obviously included in our historical stats.
Labels: ATmatix , features , pattern events , pattern states , pattern statuses , usage